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Central Banks’ Role Vital in Financial Markets

To better cope with the declining global investment appetite amid growing economic uncertainty, emerging markets should aim for a stable macroeconomy and well-communicated monetary policy, Bank Indonesia Deputy Governor Hendar told the Asian Financial Forum in Hong Kong on Tuesday.
The tightening of US monetary policy, China’s cooling economy and the collapse of commodity and oil prices have triggered a massive capital flight from emerging markets, and central bankers should take the lead in halting this trend, he said, Nikkei reported.
“It is very important for the central bank to play a significant role to maintain the confidence of foreign investors in our financial markets,” said Hendar, pointing out that emerging markets are reliant on portfolio and foreign direct investments.
In addition to their chief duties of maintaining a stable macroeconomy and pumping ample liquidity into the financial system, central bank policymakers should also foster transparency, he said.
“We have to be clear [on] what is the decision-making process of the central bank; how we communicate to the market,” Hendar said.
Transparency
Speaking at a different session, Ben Bernanke, former chair of the US Federal Reserve, also underscored the need for transparency from policymakers. He said the market would return the favor by responding accordingly.
Bernanke, who steered the US economy’s recovery from the 2008 financial crisis through quantitative easing, said the People’s Bank of China “has not been as transparent as they usually are.”
In a move that sparked market volatility, China’s central bank devalued the yuan in August last year. Some regarded the step as a competitive devaluation. China has vowed not to devalue yuan.
“One of the concerns I have is that the PBOC has not been as transparent as they usually are on what they are trying to achieve there, and if they want to tie it to a basket, for example, it might be useful to say that,” Bernanke said.
The yuan has weakened around 6% against the US dollar since the PBOC in August said it was adjusting how it sets the currency’s daily trading band mechanism, which hitherto had closely tracked the greenback higher against other major currencies. The yuan’s subsequent oscillations have been blamed for some of the volatility in regional equities with stocks off to their worst yearly start in four decades.
Giri Jadeja, global head for financial innovation at International Finance Corp., said in times of economic uncertainty, “what the market needs to know and wants to see is a certain amount of predictability.”